[Mrs 300]

I really want to understand EPS. I get the weighted average cost of CSO – so I’m good w/ the denominator. But it’s the numerator that keep tripping me up. I listened to Ninja Audio, watched Becker lecture and did practice problems. I swear someone is messing with me. This is an example of where I get confused:

1) Peters Corp’s Capital structure was as follows:

Oustanding shares of stock:

Common (yr 1) 110,000 (yr 2) 110,000

Convertible preferred (yr 1) 10,000 (yr 2) 10,000

8% convertible bonds (yr 1) 1,000,000 (yr 2) 1,000,000

During year 2, Peters paid dividends of $3,00 per share on its preferred stock. The preferred shares are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shs of common stock. Net income for year 2 was $850,000. Assume the tax rate is 30%. The basic EPS for Year 2 is:

a. $6.31

b. $6.54

c. $7.08

d. $7.45

Answer: d.

Explanation: 850K-30K/110K

I get where the numbers are coming from. BUT, preferred dividends DECLARED (and not paid) are subtracted. Why are these preferred dividends subtracted? There is another example in Becker of dividends that were paid and they did not reduce the calc.

Thanks in advance.

REG - 80 (Becker only)
BEC - 76 (Becker only)
AUD - 71, 76 (Becker only)
FAR - 65, 74, 81! (Becker, Wiley Test Bank, Ninja notes & Audio)

CPA Class of 2012 🙂

[Mrs 300]

** Should be $3.00 per share, not $3,00

REG - 80 (Becker only)
BEC - 76 (Becker only)
AUD - 71, 76 (Becker only)
FAR - 65, 74, 81! (Becker, Wiley Test Bank, Ninja notes & Audio)

CPA Class of 2012 🙂

[Mrs 300]

** Should be $3.00 per share, not $3,00

REG - 80 (Becker only)
BEC - 76 (Becker only)
AUD - 71, 76 (Becker only)
FAR - 65, 74, 81! (Becker, Wiley Test Bank, Ninja notes & Audio)

CPA Class of 2012 🙂

[Anonymous]

Even though the dividend was labeled as “paid” in the question, I think you have to assume it was also declared in the same period. If i remember correctly Becker said minus the preferred dividends declared (either paid or not yet paid)

[Anonymous]

Even though the dividend was labeled as “paid” in the question, I think you have to assume it was also declared in the same period. If i remember correctly Becker said minus the preferred dividends declared (either paid or not yet paid)

[momto5]

Yes, I seem to remember something about subtracting if they are declared. If they are paid in the following year, for instance, but had been declared the previous year, then they were already accounted for when they were declared and you wouldn't subtract them the year they were paid.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[momto5]

Yes, I seem to remember something about subtracting if they are declared. If they are paid in the following year, for instance, but had been declared the previous year, then they were already accounted for when they were declared and you wouldn't subtract them the year they were paid.

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[Mrs 300]

Thanks peeps. I have to remember that on the exam, the questions are usually more straightforward.

REG - 80 (Becker only)
BEC - 76 (Becker only)
AUD - 71, 76 (Becker only)
FAR - 65, 74, 81! (Becker, Wiley Test Bank, Ninja notes & Audio)

CPA Class of 2012 🙂

[Mrs 300]

Thanks peeps. I have to remember that on the exam, the questions are usually more straightforward.

REG - 80 (Becker only)
BEC - 76 (Becker only)
AUD - 71, 76 (Becker only)
FAR - 65, 74, 81! (Becker, Wiley Test Bank, Ninja notes & Audio)

CPA Class of 2012 🙂

[Young Shil]

Becker says :

Cumulative PS. – deduct

Non-cumulative PS – if declared- deduct

Non-cumulative PS – not declared – not required

Class of 2012 - 13.

[Young Shil]

Becker says :

Cumulative PS. – deduct

Non-cumulative PS – if declared- deduct

Non-cumulative PS – not declared – not required

Class of 2012 - 13.

[skmt57]

I don't quite understand the preferred dividends aspect. How do you know to use the 30,000 shares and not 20,000 shares? Sorry, I may be looking at all of this wrong, but it is really confusing me.

BEC 75 Oct 2013
REG 73, 93 Jan 2014
FAR 84 May 2014
AUD 81 Aug 2014

[skmt57]

I don't quite understand the preferred dividends aspect. How do you know to use the 30,000 shares and not 20,000 shares? Sorry, I may be looking at all of this wrong, but it is really confusing me.

BEC 75 Oct 2013
REG 73, 93 Jan 2014
FAR 84 May 2014
AUD 81 Aug 2014

[stoleway]

@skmt57

Yr2 preferred shares outstanding 10,000 x $3.00 (Dividend paid) = $30,000

The 20,000 shares you're referring to is a Potential Common Stock, it has not been converted into a common stock yet.

That part of the puzzle is only important if you're asked to solve for DEPS

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

@skmt57

Yr2 preferred shares outstanding 10,000 x $3.00 (Dividend paid) = $30,000

The 20,000 shares you're referring to is a Potential Common Stock, it has not been converted into a common stock yet.

That part of the puzzle is only important if you're asked to solve for DEPS

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Marc]

When they ask for Diluted Earnings Per Share, Start thinking about how many common stock the bonds or proffered stock could be converted to…

As long as they are only asking about the basic EPS, Forget that they even mentioned that they are convertible to any amount of common stock.

No signature needed.

Passed And got my license too ..

[Author]

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